1 00:00:00,616 --> 00:00:06,688 When we think about the influence of the environment on decisions, we can think 2 00:00:06,688 --> 00:00:10,464 that perhaps the environment will be like waves. 3 00:00:10,464 --> 00:00:16,964 That it will get people to decide one thing one way, another thing another way, 4 00:00:16,964 --> 00:00:21,729 and so on, and things would move and switch, and so on. 5 00:00:21,729 --> 00:00:26,594 Or we can think to ourselves that maybe what would happen is that once we make a 6 00:00:26,594 --> 00:00:29,749 certain decision, that decision will stick with us. 7 00:00:29,749 --> 00:00:32,316 And would disproportionately influence our future decisions. 8 00:00:32,316 --> 00:00:37,536 Now I want us to think about what is the role of our first decision in the category 9 00:00:37,536 --> 00:00:42,500 on our future decisions in that category. So I want you to think about the following 10 00:00:42,500 --> 00:00:46,434 case. How should people decide about buying 11 00:00:46,434 --> 00:00:49,357 coffee? What is the rational model that tells us 12 00:00:49,357 --> 00:00:51,892 how we should decide if to buy coffee or not? 13 00:00:51,892 --> 00:00:55,920 And the rational model is very simple. You have evaluation, how much you think 14 00:00:55,920 --> 00:00:59,485 you would get from this coffee? What kind of pleasure you expect to get 15 00:00:59,485 --> 00:01:02,543 from this coffee? And if the pleasure is high you would pay 16 00:01:02,543 --> 00:01:06,515 more, if it's low you would pay less. And for each amount of pleasure, you have 17 00:01:06,515 --> 00:01:10,230 an associate amount of money. So you say, how much pleasure do I expect 18 00:01:10,230 --> 00:01:13,466 to get from this cup of coffee? You say huh, $2.40. 19 00:01:13,466 --> 00:01:18,430 If they charge me more, I will not pay. If they charge me less, I would pay. 20 00:01:18,430 --> 00:01:23,590 This is the standard rational model of saying what is the, how much are we 21 00:01:23,590 --> 00:01:27,200 willing to pay for coffee. Now, that's a model that says that we 22 00:01:27,200 --> 00:01:31,719 actually know how to evaluate coffee. Instead, I want to propose something we 23 00:01:31,719 --> 00:01:35,702 call self herding model. And the self herding model is the model 24 00:01:35,702 --> 00:01:39,596 that says that we're influenced by our past decisions as we make future 25 00:01:39,596 --> 00:01:42,658 decisions. So, first of all, let's think about, 26 00:01:42,658 --> 00:01:45,955 what's herding? Herding is the idea that we follow other 27 00:01:45,955 --> 00:01:48,486 people. For example, imagine that you walk down 28 00:01:48,486 --> 00:01:51,229 the street, and you see two empty restaurants. 29 00:01:51,230 --> 00:01:54,180 You don't know which one to choose. You don't know anything about them. 30 00:01:54,180 --> 00:01:56,980 You pick one. Somebody else comes after you. 31 00:01:56,980 --> 00:01:59,450 They also know nothing. But they see one restaurant with one 32 00:01:59,450 --> 00:02:02,637 person, and one restaurant with zero. What do they do? 33 00:02:02,638 --> 00:02:05,772 They follow the herd. They go to the restaurant with one person. 34 00:02:05,772 --> 00:02:08,150 Somebody else comes. They see a restaurant with two, they 35 00:02:08,150 --> 00:02:10,560 follow that. Another person comes, they see three, and 36 00:02:10,560 --> 00:02:12,804 so on. Eventually, one restaurant is a big hit. 37 00:02:12,805 --> 00:02:17,829 One is a complete failure with no information just because people tend to 38 00:02:17,829 --> 00:02:20,615 follow other people. Here's another example. 39 00:02:20,615 --> 00:02:24,670 Sometimes there are fires in clubs or other places that have lots of people. 40 00:02:24,670 --> 00:02:28,741 And what happened in all of those cases almost all of them, is that there 41 00:02:28,741 --> 00:02:33,571 sometimes exits where people just run over each other and kill each other as they try 42 00:02:33,571 --> 00:02:36,838 to escape. And other exits, nobody, nobody tried to 43 00:02:36,838 --> 00:02:38,893 escape. And you can think to yourself, what will 44 00:02:38,893 --> 00:02:41,224 happen? Imagine that you're in a big room with 45 00:02:41,224 --> 00:02:43,732 lots of people. And all of a sudden, there are fire 46 00:02:43,732 --> 00:02:46,597 alarms, and everybody's running in a certain direction. 47 00:02:46,598 --> 00:02:49,224 Are you going to stop? Are you going to say, hey, let me stop, 48 00:02:49,224 --> 00:02:52,548 and let me see what people are doing. Maybe there's something that everybody 49 00:02:52,548 --> 00:02:55,960 else is missing. Or you're willing to be inclined to try to 50 00:02:55,960 --> 00:03:00,390 run after them and follow the herd? Most likely you're going to try to follow 51 00:03:00,390 --> 00:03:03,207 the herd. The instinct is just incredibly strong. 52 00:03:03,208 --> 00:03:07,322 So what is self-herding? Self-herding is like herding but its 53 00:03:07,322 --> 00:03:11,530 herding that we follow ourselves. You make one decision and you remember 54 00:03:11,530 --> 00:03:15,470 what decision you make. And therefore you like it to follow it and 55 00:03:15,470 --> 00:03:19,760 follow it and follow it, and let me kind of explain to you how this might look like 56 00:03:19,760 --> 00:03:22,838 in coffee. So imagine that it is 14 years ago or 15 57 00:03:22,838 --> 00:03:27,108 years ago and you live in Boston. And every day, you get up in the morning 58 00:03:27,108 --> 00:03:31,500 and you go to the office, and on the way you stop at Dunkin' Donuts which is a 59 00:03:31,500 --> 00:03:34,923 simple coffee shop, and you buy a cup of coffee for $0.40. 60 00:03:34,923 --> 00:03:37,607 And you go to the office and you're very happy. 61 00:03:37,608 --> 00:03:40,924 And you're used to that. And one day, it's 4 o'clock in the 62 00:03:40,924 --> 00:03:43,417 afternoon. You're thirsty, you're tired, you need 63 00:03:43,417 --> 00:03:45,662 coffee, and you also need to run some errand. 64 00:03:45,662 --> 00:03:49,963 You are going to run some errand, you really feel like coffee, and you see this 65 00:03:49,963 --> 00:03:52,250 new coffee place. Let's say it's Starbucks. 66 00:03:52,250 --> 00:03:56,337 And you have never seen Starbucks before and you know nothing about them, but you 67 00:03:56,337 --> 00:04:00,424 really thirsty and you are tired and you are a little aggravated and you walk into 68 00:04:00,424 --> 00:04:02,869 Starbucks. And you can't believe how much coffee 69 00:04:02,869 --> 00:04:05,902 costs. You've been paying $0.40 up to now and you 70 00:04:05,902 --> 00:04:10,521 can't even imagine that coffee could cost all of a sudden 2.50 and 3.50. 71 00:04:10,521 --> 00:04:14,338 But you know what, you're there already, you, you're really dying for coffee, and 72 00:04:14,338 --> 00:04:16,500 you don't feel like walking four more blocks. 73 00:04:16,500 --> 00:04:21,477 So you're buying coffee there. You go out, you go for your errands. 74 00:04:21,477 --> 00:04:24,760 Three days later, you pass by this same corner again. 75 00:04:24,760 --> 00:04:27,660 What do you remember about your past decisions? 76 00:04:27,660 --> 00:04:31,500 Do you remember why you did it? Do you remember your emotional states? 77 00:04:31,500 --> 00:04:35,343 Do you remember how much in a hurry you were, how much of a need of caffeine you 78 00:04:35,343 --> 00:04:38,914 need, how much, how aggravated you were? Of course not. 79 00:04:38,914 --> 00:04:42,150 Three days ago at 4 o'clock in the afternoon, how did you feel? 80 00:04:42,150 --> 00:04:44,813 Do any of you remember? Of course not. 81 00:04:44,813 --> 00:04:50,357 We have very bad memory for emotional states, but we do remember our actions. 82 00:04:50,358 --> 00:04:55,254 So in the same way you said to yourself, I don't remember why, but I remember that 83 00:04:55,254 --> 00:04:59,768 the past me from three days ago stood here and made this decision to go into 84 00:04:59,768 --> 00:05:02,652 Starbucks. Therefore, it must be a fantastic 85 00:05:02,652 --> 00:05:04,947 decision. I always make fantastic decisions. 86 00:05:04,948 --> 00:05:07,990 Let me do it again. And then you do it again, and again, and 87 00:05:07,990 --> 00:05:11,167 again, and again. And after a while, you stop thinking about 88 00:05:11,167 --> 00:05:13,440 whether this was the right decision or not. 89 00:05:13,440 --> 00:05:16,832 You assume, in the same way that when you have a long line of people, you assume 90 00:05:16,832 --> 00:05:20,292 that they know something. When you have a long line of you making 91 00:05:20,292 --> 00:05:24,828 the same decisions in the past, you assume that this was the right, the right 92 00:05:24,828 --> 00:05:28,019 decision. Now, here's an experiment to get us to 93 00:05:28,019 --> 00:05:32,917 think about this, about how the role of the first decision influence later 94 00:05:32,917 --> 00:05:35,372 decision. So I've done this many times, I come to a 95 00:05:35,372 --> 00:05:38,378 big group of people. And I say, here are some products, for 96 00:05:38,378 --> 00:05:41,640 example. A trackball, a keyboard a cheap wine, an 97 00:05:41,640 --> 00:05:45,430 expensive wine, design book, and some Belgium chocolates. 98 00:05:45,430 --> 00:05:48,437 In experiments, we don't tell people how much the wine cost. 99 00:05:48,437 --> 00:05:52,603 We just describe the wine, the wine from wine specter and wine magazine, and so on. 100 00:05:52,603 --> 00:05:55,330 And we pass the products around. So that everybody can look at them. 101 00:05:55,330 --> 00:05:59,118 And examine them, and so on. And then we say, okay, now that you know 102 00:05:59,118 --> 00:06:03,020 all the products, here's a list, here's a piece of paper with all the products. 103 00:06:03,020 --> 00:06:07,644 And at the top, we ask you to put the last two digits of your social security number, 104 00:06:07,644 --> 00:06:12,712 of your national ID number. And everybody puts the number, in my case 105 00:06:12,712 --> 00:06:14,980 it would be 79. People write these numbers. 106 00:06:14,980 --> 00:06:19,015 And then we say, please take that number and make it into a dollar amount. 107 00:06:19,015 --> 00:06:23,303 So, in my case, it would be $79. And write that amount in dollars next to 108 00:06:23,303 --> 00:06:26,596 each of those items. So people have numbers that end up in high 109 00:06:26,596 --> 00:06:30,372 numbers, will write high numbers, people that have numbers that end up in low 110 00:06:30,372 --> 00:06:34,156 numbers would write low numbers. And then we say, hypothetically, would you 111 00:06:34,156 --> 00:06:37,134 pay this amount in dollars for each of those products? 112 00:06:37,135 --> 00:06:40,739 And people say yes or no, yes or no, hypothetically. 113 00:06:40,739 --> 00:06:43,940 And then we say, and now, please submit a real bid. 114 00:06:43,940 --> 00:06:47,987 We're going to have an auction, we'll find the highest bidders, they'll pay, they'll 115 00:06:47,987 --> 00:06:50,510 get the products for real, but submit your real bids. 116 00:06:50,510 --> 00:06:55,762 People submit their real bids. We find out who is the highest bidder. 117 00:06:55,762 --> 00:06:58,210 They pay. We give them the product. 118 00:06:58,210 --> 00:07:01,858 And we also ask people, we say, do you think that your social security number, 119 00:07:01,858 --> 00:07:04,047 these random two digits, had any influence? 120 00:07:04,048 --> 00:07:07,390 And people say, of course not. But when we look at the results. 121 00:07:07,390 --> 00:07:10,199 We find that they had a real big influence. 122 00:07:10,199 --> 00:07:13,350 And here's, kind of, an example from one experiment. 123 00:07:13,350 --> 00:07:18,672 When we look at people who had social security numbers below 50, these are the 124 00:07:18,672 --> 00:07:23,480 average prices they paid. When we look at people that have ending 125 00:07:23,480 --> 00:07:28,120 numbers bel-, above 50, these are the numbers they had, and this is the 126 00:07:28,120 --> 00:07:32,360 difference in percentages. You see, it's quite, quite amazing. 127 00:07:32,360 --> 00:07:36,460 Now, do people who give you Social Security numbers know that you're going to 128 00:07:36,460 --> 00:07:39,660 be willing to spend a lot of money or spend very little money? 129 00:07:39,660 --> 00:07:43,783 Of course not. What happens is at the moment we get 130 00:07:43,783 --> 00:07:48,287 people to consider a number, that number stays in their mind. 131 00:07:48,288 --> 00:07:50,300 It doesn't have to be social security number. 132 00:07:50,300 --> 00:07:51,980 It could be the weather. It could be shoes. 133 00:07:51,980 --> 00:07:54,654 It could be whatever. In fact, the more random it is, the better 134 00:07:54,654 --> 00:07:58,010 it is for the experiment. But the moment you consider a number, that 135 00:07:58,010 --> 00:08:01,628 number stays with you. So, for example, you might say to 136 00:08:01,628 --> 00:08:07,212 yourself, hm, $79 for a bottle of wine. No, that's too expensive, but maybe I'll 137 00:08:07,212 --> 00:08:10,464 pay 50. And somebody that started with the number 138 00:08:10,464 --> 00:08:14,260 12 maybe said, 12 for a bottle of wine? Yes, I will do it, for sure. 139 00:08:14,260 --> 00:08:17,018 How much more would I pay? Well, maybe I'll pay 21. 140 00:08:17,018 --> 00:08:22,034 So basically, people start with their starting point, even if it's random, and 141 00:08:22,034 --> 00:08:25,210 stay to, close to that. Now, I should said that there was another 142 00:08:25,210 --> 00:08:29,185 interesting pattern of the data. Even though we could take each product and 143 00:08:29,185 --> 00:08:33,565 move it up and move it down, kind of arbitrarily based on social security 144 00:08:33,565 --> 00:08:36,074 number. And the relationship between them were 145 00:08:36,074 --> 00:08:38,817 quite good. So, for example, everybody was willing to 146 00:08:38,817 --> 00:08:41,470 pay more for the expensive wine than the cheap wine. 147 00:08:41,470 --> 00:08:44,930 We couldn't switch that. Everybody was willing to pay more for the 148 00:08:44,930 --> 00:08:49,165 keyboard than the trackball. Once you pick a specific product, other 149 00:08:49,165 --> 00:08:54,945 products in the same category follow a particular trend and remains in a relative 150 00:08:54,945 --> 00:08:58,983 good position. But you can switch everything up and down 151 00:08:58,983 --> 00:09:02,850 quite, quite easily. And this is all about the role of the 152 00:09:02,850 --> 00:09:05,980 first decision. It suggests that once we make a first 153 00:09:05,980 --> 00:09:10,335 decision, we remember that decision, and that decision becomes, we call it an 154 00:09:10,335 --> 00:09:13,377 anchor, a starting point for our future decision. 155 00:09:13,378 --> 00:09:21,527 This, of course brings to mind that famous story from Tom Sawyer and Mark Twain. 156 00:09:21,527 --> 00:09:27,210 And if you remember the story, the story is that Tom Sawyer escaped from school and 157 00:09:27,210 --> 00:09:31,089 went to the river. And Aunt Polly caught him, and Aunt Polly 158 00:09:31,089 --> 00:09:36,002 banished him to whitewash the fence. And here it is, it's Sunday and Tom Sawyer 159 00:09:36,002 --> 00:09:39,941 is whitewashing the fence. And his friend Billy the Steam is coming 160 00:09:39,941 --> 00:09:42,864 down from the hill and he's saying, poor Tom Sawyer. 161 00:09:42,864 --> 00:09:47,390 You have to spend Sunday whitewashing the fence and I am going to go to the river. 162 00:09:47,390 --> 00:09:51,880 And Tom Sawyer doesn't move. He continues to whitewash the fence. 163 00:09:51,880 --> 00:09:55,220 And then Billy the Steam continues to make fun of him. 164 00:09:55,220 --> 00:09:59,509 And Tom Sawyer turns around to him and says, What do you mean, 'poor Tom Sawyer'? 165 00:09:59,509 --> 00:10:02,225 It's not every day that a kid gets to paint a fence. 166 00:10:02,225 --> 00:10:05,710 And Billy the Steam says, oh, you know, that's kind of interesting. 167 00:10:05,710 --> 00:10:10,120 Can I try? And Tom Sawyer said, well, not so fast. 168 00:10:10,120 --> 00:10:14,040 Aunt Polly's particular about who she lets and who she doesn't let paint the fence. 169 00:10:14,040 --> 00:10:18,018 It's kind of a special privilege, not everybody can do it. 170 00:10:18,018 --> 00:10:22,007 And then Billy the Steam says, what if I give you my apple? 171 00:10:22,008 --> 00:10:25,134 And Tom Sawyer says yeah, for that, that seems like a good deal. 172 00:10:25,134 --> 00:10:29,154 And he lets him whitewash the fence for an apple, and more and more friends come in 173 00:10:29,154 --> 00:10:33,179 and more and more of them are giving Tom great treasures and all kinds of things. 174 00:10:33,180 --> 00:10:38,220 And Tom Sawyer reflects on the day. And he reflects on the fact that life is 175 00:10:38,220 --> 00:10:41,276 not that bad after all. And there's all kinds of things that you 176 00:10:41,276 --> 00:10:45,320 could you could do better. But what Tom Sawyer and Mark Twain suggest 177 00:10:45,320 --> 00:10:50,780 in this particular story, is that it's not only that we can make something better and 178 00:10:50,780 --> 00:10:54,170 something worse. We can actually make something from being 179 00:10:54,170 --> 00:10:58,638 positive from being negative. Is white washing the fence an adventure, 180 00:10:58,638 --> 00:11:01,680 and something good that you should be willing to pay for it? 181 00:11:01,680 --> 00:11:05,220 Or it's something negative that you should be paid for doing so. 182 00:11:05,220 --> 00:11:08,778 Now, this of course, all kind of interesting things in the market. 183 00:11:08,778 --> 00:11:13,054 There are for example. And people who go to prison to spend the 184 00:11:13,054 --> 00:11:15,610 night like in a hotel and they pay a lot of money for it. 185 00:11:15,610 --> 00:11:18,450 And there are vacations that you go to work. 186 00:11:18,450 --> 00:11:25,472 Where you go to become a farmer or you go to squash wine or pick fruit or all kinds 187 00:11:25,472 --> 00:11:28,199 of things. There's all kinds of things that can 188 00:11:28,199 --> 00:11:31,739 become from pleasure to work. And it's, it's not really clear. 189 00:11:31,740 --> 00:11:36,832 Now, we tried this version of Tom Sawyer. We tried to see whether there was 190 00:11:36,832 --> 00:11:40,304 something we could move from being pleasurable to displeasurable and the 191 00:11:40,304 --> 00:11:44,934 other way around. And we choose to think of my ability to 192 00:11:44,934 --> 00:11:49,372 recite poetry. So, so I came to a group of students. 193 00:11:49,372 --> 00:11:55,273 And I recited them a particular piece of poetry from Walt Whitman's Leaves of 194 00:11:55,273 --> 00:11:56,964 Grass. [music]. 195 00:11:56,964 --> 00:12:05,534 Whoever you are, holding me now in hand. Without one thing, all will be useless. 196 00:12:07,040 --> 00:12:12,150 I gave you fair warning, before you attempt me further. 197 00:12:12,150 --> 00:12:16,978 I am not what you suppose, but far different. 198 00:12:16,978 --> 00:12:23,900 Who is he that would become my follower? Who would sign himself as a candidate for 199 00:12:23,900 --> 00:12:27,815 my affection. The way, suspicious. 200 00:12:27,815 --> 00:12:33,597 The result, uncertain, perhaps destructive. 201 00:12:33,598 --> 00:12:40,641 You will have to give up all else. I alone will expect to be your sole and 202 00:12:40,641 --> 00:12:45,115 exclusive. And after reciting the little bit of 203 00:12:45,115 --> 00:12:50,510 poetry, I said you know what? On Friday, I'm going to have a poetry 204 00:12:50,510 --> 00:12:53,783 recital. And I'm going to have three poetry 205 00:12:53,783 --> 00:12:57,252 recital, short, middle length, and long one. 206 00:12:57,252 --> 00:13:01,615 And then I said look, I don't have space for all of you, this was a very big class, 207 00:13:01,615 --> 00:13:05,346 I only have space for a few. So I'm going to have an auction procedure 208 00:13:05,346 --> 00:13:09,207 for you to decide who would get into the recital and who would not. 209 00:13:09,208 --> 00:13:13,564 And I gave people a sheet of paper to submit their bids. 210 00:13:13,564 --> 00:13:17,503 But for some people I said in the beginning, before you start, tell me 211 00:13:17,503 --> 00:13:21,988 hypothetically whether you would be willing to pay $10 to listen to Professor 212 00:13:21,988 --> 00:13:26,620 Riales recite poetry for five minutes. And they, they said yes or no, and then 213 00:13:26,620 --> 00:13:29,610 they said how much they would pay for the short, medium and long recital. 214 00:13:29,610 --> 00:13:33,834 To other people, it was the same thing, but we said hypothetically, before we 215 00:13:33,834 --> 00:13:37,860 start, tell me whether you would be willing to listen to Professor Rielli 216 00:13:37,860 --> 00:13:40,684 recite poetry for five minutes if we paid you $10. 217 00:13:40,684 --> 00:13:45,980 What happened? The people who we asked them about willing 218 00:13:45,980 --> 00:13:51,220 to pay, paying $10, were willing to pay. The people we asked them about we paying 219 00:13:51,220 --> 00:13:53,674 them, wanted to listen only if we pay them. 220 00:13:53,674 --> 00:13:58,094 So what happened is that people don't know if me reciting poetry is good or bad, and 221 00:13:58,094 --> 00:14:01,625 we can change their understanding based on the first question. 222 00:14:01,625 --> 00:14:05,400 And what about longer poetry reading? They just went in the same direction. 223 00:14:05,400 --> 00:14:09,235 So if somebody thought about it in the negative direction, that they should be 224 00:14:09,235 --> 00:14:12,980 paid, then they thought they should be paid for longer poetry reading more. 225 00:14:12,980 --> 00:14:17,497 And if somebody thought it was positive, they're willing to pay more for long po-, 226 00:14:17,498 --> 00:14:20,918 poetry readings. So the fact is that people don't know, for 227 00:14:20,918 --> 00:14:25,730 example here, if this is good or bad. But once they decide, everything becomes 228 00:14:25,730 --> 00:14:30,060 coherent, everything becomes sensible within that, within that range. 229 00:14:30,060 --> 00:14:33,402 Now, let's go back to Starbucks and Dunkin' Donuts. 230 00:14:33,402 --> 00:14:39,082 Because if you think about first decision influence later decisions, you could ask, 231 00:14:39,082 --> 00:14:43,577 how come Dunkin' Donuts did not influence Starbucks' decisions? 232 00:14:43,577 --> 00:14:48,889 If we had decisions about coffee, why isn't my first decision about coffee at 233 00:14:48,889 --> 00:14:53,557 $0.40 influencing my later willing to pay for coffee at Starbucks? 234 00:14:53,558 --> 00:14:58,315 And it, the point here is that Starbucks did lots of things to get us not to think 235 00:14:58,315 --> 00:15:02,642 about Starbucks and Dunkin' Donuts as decisions in the same category. 236 00:15:02,642 --> 00:15:08,836 Think about it. When you go to restaurants and you look at 237 00:15:08,836 --> 00:15:11,640 the menu, do you compare things across categories? 238 00:15:11,640 --> 00:15:15,864 For example, have you ever looked at the wine menu and said, my goodness, for the 239 00:15:15,864 --> 00:15:20,088 difference in price between these two bottles of wine, I can get four gallons of 240 00:15:20,088 --> 00:15:23,195 milk? Of course you don't, you don't think about 241 00:15:23,195 --> 00:15:25,935 other categories. We compare appetizers to appetizers, and 242 00:15:25,935 --> 00:15:30,580 main dishes to main dishes. Desserts to desserts, wine to wine, beer 243 00:15:30,580 --> 00:15:34,247 to beer. We don't compare even within the menu. 244 00:15:34,248 --> 00:15:39,577 And what Starbucks wanted to ensure. Is that we don't compare Starbucks coffee 245 00:15:39,577 --> 00:15:42,660 to Dunkin Donuts coffee. And how do they do it? 246 00:15:42,660 --> 00:15:45,590 By all kinds of superficial by, important things. 247 00:15:45,590 --> 00:15:50,337 First of all, they did not start by selling donuts and cookies and muffins. 248 00:15:50,338 --> 00:15:53,568 Imagine the following case. Imagine that Starbucks started and they 249 00:15:53,568 --> 00:15:56,280 created stores that were just like Dunkin' Donuts. 250 00:15:56,280 --> 00:15:59,485 The same design. They sold everything, only the coffee was 251 00:15:59,485 --> 00:16:02,186 better quality. How much more would you be willing to pay 252 00:16:02,186 --> 00:16:05,595 for coffee under those conditions? If you could contrast them directly and 253 00:16:05,595 --> 00:16:09,225 compare them, I'm betting that you would not be willing to pay much more for that 254 00:16:09,225 --> 00:16:12,585 coffee. But they basically wanted to separate the 255 00:16:12,585 --> 00:16:16,740 decision as if it's wine and milk. So they told this about single-bean 256 00:16:16,740 --> 00:16:20,334 coffee. And they told us about they sold us French 257 00:16:20,334 --> 00:16:22,965 presses. And there were no donuts and there were no 258 00:16:22,965 --> 00:16:27,712 doughnut holes and there were no muffins. There were only french and Italian 259 00:16:27,712 --> 00:16:30,040 pastries. And you couldn't ask for a small coffee. 260 00:16:30,040 --> 00:16:32,896 If you asked for a small coffee they would say, excuse me, I have no idea what you're 261 00:16:32,896 --> 00:16:34,880 talking about. We have all these other things, 262 00:16:34,880 --> 00:16:43,427 mochaccino, frappuccino. And we, we only have macchiatos and croissants and 263 00:16:43,427 --> 00:16:47,304 biscotti, and so on. And because of that, because of all of 264 00:16:47,304 --> 00:16:50,464 these superficial things. We did not compare the two directly. 265 00:16:50,464 --> 00:16:54,130 And we were willing to treat Starbucks as a new category of decision. 266 00:16:54,130 --> 00:16:57,262 And accept whatever price. They were offering to us. 267 00:16:57,262 --> 00:17:01,780 Now, many years later, the decision to spend more money on coffee, and the 268 00:17:01,780 --> 00:17:05,064 decision to go into Starbucks is already automatic. 269 00:17:05,064 --> 00:17:08,060 Now, we don't need to think about it. It's something we just do without 270 00:17:08,060 --> 00:17:10,750 thinking. And because of that, now Starbucks can 271 00:17:10,750 --> 00:17:13,856 change. Starbucks can start selling us muffins and 272 00:17:13,856 --> 00:17:17,766 cookies, and even donuts. Something they couldn't have done in the 273 00:17:17,766 --> 00:17:21,384 beginning because of the separation they can now do because we don't think about 274 00:17:21,384 --> 00:17:25,228 the decision so much. This by the way also resonated very well 275 00:17:25,228 --> 00:17:28,765 with what Conrad Lawrence showed many years ago. 276 00:17:28,765 --> 00:17:33,622 Conrad Lawrence was an amazing researcher and he showed that if. 277 00:17:33,623 --> 00:17:39,151 Ducklings hatch what they do is they look at the first figure in front of them and 278 00:17:39,151 --> 00:17:42,698 start following it. And in fact for many of them Conrad 279 00:17:42,698 --> 00:17:46,555 Lawrence was that figure. He was just waiting for the ducklings to 280 00:17:46,555 --> 00:17:49,877 hatch they observed him and then they kept on following him. 281 00:17:49,878 --> 00:17:53,880 Its a really good analogy for how we think about the first decision. 282 00:17:53,880 --> 00:17:57,762 Its imprinted on us. And then we're just making the same 283 00:17:57,762 --> 00:18:01,734 decision over and over without thinking very much about it. 284 00:18:01,734 --> 00:18:07,410 There's couples of ways to think about how this idea of initial pricing influancing 285 00:18:07,410 --> 00:18:12,127 later pricing, and influnce us in the recent activities in the world. 286 00:18:12,128 --> 00:18:13,980 So think for example about the first iPhone. 287 00:18:13,980 --> 00:18:16,754 When the first iPhone was introduced in the US. 288 00:18:16,755 --> 00:18:21,652 It was introduced at $600. And very quickly, Apple said, sorry, 289 00:18:21,652 --> 00:18:25,879 sorry, sorry, it's only $400. Was this a good pricing strategy or a bad 290 00:18:25,879 --> 00:18:28,926 pricing strategy? When I talked to the people at Apple, they 291 00:18:28,926 --> 00:18:31,020 said, of course, it was a brilliant strategy. 292 00:18:31,020 --> 00:18:34,115 But let's think to ourself about what do we think about this. 293 00:18:34,116 --> 00:18:37,642 So imagine two universes. In one of them, the first iPhone is 294 00:18:37,642 --> 00:18:41,309 introduced at $400 and the other one is introduced at $600. 295 00:18:41,309 --> 00:18:46,331 And then very, very quickly, they said no, no, sorry, sorry, sorry; it's only $400. 296 00:18:46,332 --> 00:18:52,342 In which of those two universes would you be more likely to buy the iPhone at $400? 297 00:18:52,342 --> 00:18:54,742 Here's the thing, as a consumer, you have this new device. 298 00:18:54,742 --> 00:18:57,170 And you have to figure out how much it's worth. 299 00:18:57,170 --> 00:18:59,772 Is it $20? Is it $200? 300 00:18:59,772 --> 00:19:02,527 Is it $600? How much is it worth to you? 301 00:19:02,528 --> 00:19:05,410 Very hard to figure out. So now, think about it. 302 00:19:05,410 --> 00:19:09,442 What happens in these two universes? If it's $400, you have to really figure 303 00:19:09,442 --> 00:19:14,466 out how much it's worth to you. But if it went down from 600 to 400. 304 00:19:14,466 --> 00:19:17,080 Now, all of a sudden, you could do a relative comparison. 305 00:19:17,080 --> 00:19:21,616 And even though the $600 is no longer available, as long as it's available in 306 00:19:21,616 --> 00:19:27,018 your memory, the contrast is still there. And now, you say to yourself, it's two of, 307 00:19:27,018 --> 00:19:31,089 2 3rds of the price. Clearly a good deal, now creating a much 308 00:19:31,089 --> 00:19:34,563 better version. It looks much more appealing. 309 00:19:34,563 --> 00:19:40,207 So when you do relative prices, relative prices can be to things that are existing 310 00:19:40,207 --> 00:19:42,937 in the market. But they could also be to phantom 311 00:19:42,937 --> 00:19:46,719 products, things that used to be existed in the market or exist only in your 312 00:19:46,719 --> 00:19:47,417 memory. Now, later on in the U.S. 313 00:19:47,417 --> 00:19:53,651 Apple decreased the price of the iPhone even further, and rolled the extra price 314 00:19:53,651 --> 00:19:57,766 in to the monthly fee to the cell phone companies. 315 00:19:57,766 --> 00:20:01,811 And then what happened? Then they introduce the big iPhone, the 316 00:20:01,811 --> 00:20:04,520 iPad. Now, what happens? 317 00:20:04,520 --> 00:20:07,170 You have the same device without the phone and only bigger. 318 00:20:07,170 --> 00:20:11,408 You have the same screen, only bigger. How much can you charge for it? 319 00:20:11,408 --> 00:20:15,636 Well, how much you can charge for the iPad has very little to do with the actual 320 00:20:15,636 --> 00:20:19,274 value that it's giving. And a lot to do with the relative size and 321 00:20:19,274 --> 00:20:23,407 the relative price. Whatever you price the iPhone, the iPad 322 00:20:23,407 --> 00:20:26,965 kind of tracks. Not exactly per square inch, but it tracks 323 00:20:26,965 --> 00:20:30,290 in the relative similar ways. And you know what? 324 00:20:30,290 --> 00:20:34,439 All the other tablets have to follow the iPad pricing as well. 325 00:20:34,440 --> 00:20:40,011 We are relative, comparative creatures. We're looking at price in relative way, 326 00:20:40,011 --> 00:20:45,607 it's very hard for any product to come up outside of this, of this comparison. 327 00:20:45,608 --> 00:20:49,177 The same thing, by the way, can be said about the internet, more generally. 328 00:20:49,178 --> 00:20:52,886 When the internet started, we called this internet zero point zero, there was a 329 00:20:52,886 --> 00:20:55,616 logic. And the logic was, let's give everything 330 00:20:55,616 --> 00:20:58,754 for free. And if we give everything for free people 331 00:20:58,754 --> 00:21:02,190 would come and, come and, come and, come in masses and that was true. 332 00:21:02,190 --> 00:21:06,882 And then they said and once people come in masses and use our services they will get 333 00:21:06,882 --> 00:21:11,307 used to it and will want to use it and they'll be willing to pay 19.95 for that. 334 00:21:11,308 --> 00:21:16,732 That was not so true because when we experience, experience something we might 335 00:21:16,732 --> 00:21:20,242 value it. But not necessarily be willing to pay for 336 00:21:20,242 --> 00:21:22,594 it. And because of that, by the way, we move 337 00:21:22,594 --> 00:21:26,949 to this internet as being an advertising platform rather than a platform that 338 00:21:26,949 --> 00:21:30,228 people pay for it. And the point here, the point I want you 339 00:21:30,228 --> 00:21:34,234 to think about is that once we make initia, initial decisions. 340 00:21:34,235 --> 00:21:38,545 Other decisions follow. The way we train people to think initially 341 00:21:38,545 --> 00:21:43,857 is most likely going to be the way that they're going to make decisions later on. 342 00:21:43,858 --> 00:21:49,722 It also suggests that when we introduce a new product we have a tremendous latitude 343 00:21:49,722 --> 00:21:53,669 in how we want people to think about how we can price it. 344 00:21:53,670 --> 00:21:59,140 But once we've introduce it and people got used to thinking about in a certain way, 345 00:21:59,140 --> 00:22:02,332 it's really hard to escape that comparison point.